At Last – An Asset Class Achieving High Ownership at Low Cost


By: Nick Zasowski, Director at Global Startup Studio Network

Startup studios are gaining steam across the angel investing landscape. With numbers like they are reporting, it’s easy to understand why. As the Global Startup Studio Network (GSSN) researched last year, the early signs of studio data are just the beginning for the growing expectations. Eighty-four percent of startups coming out of studios go on to raise a seed round. Of those startups that make it to the seed round, 72% advance from seed to Series A, compared to only 42% of traditional startups. 

For those who may be unfamiliar, the term “startup studio” can be used interchangeably with “venture studios,” “venture builders,” or “company builders.” For today, we’ll refer to them simply as “studios.” Studios are so successful because they are a compilation of startup all-star teams that solve real problems in the world by matching great ideas with the best entrepreneurial talent to build great companies. Studios do this by using repeatable frameworks (imagine a factory) to test these ideas and back them with funding and resources in order to launch and grow powerful, scalable startups. 

With great innovation comes big change, or even better, disruption, to systems that have been in place for years. Studios are causing this precise disruption to the traditional ways of building companies and how to invest in them. Most funds and institutional investors are wary to invest in this model due to the unique cap table structure. With larger funds also come more rules and structures around the investment thesis and strategy. This inflexibility has left the door open for other groups of nimble investors. As studios experience this tension, they have primarily turned to angel networks and family offices who are more open to investing in creative models. 

As the proliferation of this model continues, we also notice the substantial growth of the asset class. Studios are established and growing at an exponential rate. Just last year, Enhance Ventures reported that there are roughly 560 studios across the globe, representing more than 625% growth over the last seven years. This unprecedented growth provides a wealth of new opportunity for the investment community.

As put by Doug Beyer, managing director at Radianx Capital, “Disruptive investment strategies and models are hard to come by and it is even more rare to be an early investor in an asset class or strategy before they’re overcrowded; if venture capital is an important part of your existing portfolio then venture studios deserve serious consideration.”

With their unique model, studios create the opportunity to achieve high ownership at a low cost (see Exhibit A in the white paper), thus mitigating the risk for loss and creating a great opportunity for gains. This has created an arbitrage opportunity for angels and family offices who are willing to invest in creative startup building models.

One example is through TI Platform Management, the leading anchor investor for over a dozen studios, who recognizes that by displacing traditional venture capital firms as intermediaries, studio models provide compounded advantages for LPs. LPs then gain direct access to proven entrepreneurs — like Elon Musk, Max Levchin, and Peter Thiel — and to the companies they create, all at an attractive fee structure and with higher ownership stakes in breakout companies.

Studios also shorten and enhance the “zero to one” creation cycle, help entrepreneurs avoid ownership dilution, and most importantly, allow serial entrepreneurs to do what they do best: imagine, iterate, prototype, and test new products. Through this proven process, TI Platform has invested in entrepreneurs whose companies have achieved a total market cap exceeding $830B.

“Studios are an outperforming asset class because they are able to buy ownership in a capital-efficient way and are able to control the growth and scale through a dedicated bench of talent. Due to their high ownership and founding roles, we also believe that studios are less likely to be pushed down or washed out in the waterfall.” — Sarah Anderson, Managing Director at Cintrifuse 

With new disruptive models also come some growing pains. The prominent bottleneck all studios face is their access to human and financial capital. Without access to quality human capital to be the next CEO to run their venture, studios are left high and dry due to timing constraints. Next, studios face an uphill battle in terms of financial capital. With an old industry comes outdated practices. 

Speaking of older or more common asset classes, one common question we receive is, “What is the difference between the studio model and the accelerator model?” There are a few differences between these; the first and main difference between the two is the stage of the startup. Studios are creating companies out of nothing and coming alongside them as institutional co-founders, whereas accelerators have cohorts of startups averaging 10 around the seed round and provide them with resources and mentorship to scale quickly over a short amount of time, usually three to six months.

The second key difference is the amount of equity. Studios range from having equity anywhere from 15% to 100% and averaging around 40% of the startups that they found. With major skin in the game, studios are just as motivated to make each company a success in comparison to accelerators, who average equity stake in a startup is closer to 7%.

The third difference is the amount of capital (financial and human) that studios put into each startup they form. Studios, on average, invest $500,000 into each company they create. And from an employment side of the house, studios provide a full team (12 people on average) with unique industry expertise to help companies scale at nearly twice the pace of average startups.

Finally, studios have a laser focus on the startups they build. Because of their factory-like approach to building companies, only the most validated startups survive and launch. On average, studios are building between two to five companies per year. This is in comparison to accelerators, who work with around 10 startups per cohort.

Next time you talk to a studio, make sure not to compare them to an accelerator, because there are so many differences from simply creating companies from scratch all the way to the amount of capital they invest as institutional cofounders.

A great example is comparing leading accelerator Y-Combinator and leading studio Idealab:

Startups:

Idealab: 100+
Y-Combinator: 2,000+

Exit:

Idealab: 35%
Y-Combinator: 13%

Unicorns:

Idealab: 5%
Y-Combinator: 0.5%

As the studio capital structure innovates and disrupts traditional investing, it is important to remember what makes studios a capital-efficient model. Studios deliver immense value at an incredibly fast rate because of their ability to attract investors and talent around solving the world’s biggest problems. Studios address those problems by building companies and backing them as institutional co-founders, building repeatable processes, and backing these companies with the necessary funds so that they are ready to scale. As we see more startup successes come out of studios like Snowflake, Moderna, Dollar Shave Club, Hims[DS1] , and many others, we will continue to see expanded interest from the investment community. 

To learn more about investors finding capital efficiency in studios, download the Disrupting the Venture Landscape white paper. Or, reach directly out to the GSSN Team at hello@gssn.co or to one of the studios in their highly curated network to learn more about this exciting model.

About Nick Zasowski:

Nick Zasowski leads the studio community for GSSN.co, a highly-curated network of the world’s most innovative startup studios, venture studios, company builders and venture builders. Recently Nick authored a white paper on the research around startup studios and how they are disrupting the venture landscape. Nick has had the opportunity to speak on this with the University of Cambridge business school and the industry's leading corporate innovation conference, Alloy. Prior to his time with GSSN, Nick led global partnerships, curating the accelerator network for parent organization GAN.co. Being involved with multiple stakeholders across startup ecosystems, Nick loves connecting the world’s leading innovators together so that everyone can reach their next level of potential.

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